People who’ve been following the debate about global warming closely will be aware that the economic modelling used in projections of future climate change by the IPCC has been severely criticised by former Australian Statistician Ian Castles and former OECD chief economist David Henderson. The critique emerged in a rather confused form, with a number of letters and opinion pieces before finally being published in contrarian social science journal Energy and Environment. Responses, including mine, have been similarly partial and sporadic.
I’ve finally prepared a full-scale response to the main claim made by Castles and Henderson, that the use of market exchange rates, rather than “Purchasing Power Parity” conversion factors for national currencies, biases estimates of future emissions upwards. My conclusion is that although PPP measures are preferable in comparisons of national welfare, the biases introduced by using market exchange rates are not important in modelling emissions and will, on average, cancel out. You can read it all here.
Update: Ian Castles has sent a response which I’ve posted here. It doesn’t seem to me that Ian responds to my argument except to deny that the MER/PPP issue was the main point of the critique.
I should also note that Holtsmark and Alfsen (2004), whose paper I’ve just found, present much the same argument as mine.
Further update In the comments discussion, a fair degree of common ground has been reached. Ian clarifies that he and Henderson object to MER conversion factors, but not because they bias projections of emissions, saying
I agree that these arguments (about the errors in GDP growth and emissions intensity reductions cancelling one another out) are sound as a first approximation.
Ian makes the valid point that use of MER conversion produces the incorrect conclusion that the energy-intensity of LDCs is about the same as prevailed in developed countries when their income was similar. This could lead to misleading policy inferences, for example with respect to mitigation policy and should be corrected.
I agree with Ian that it is better to use PPP measures consistently, and that the sooner the IPCC does this the better. On the other hand, I think it’s important to make the point that the widely-repeated claims that IPCC projections of emissions are fundamentally erroneous because of the choice of exchange rate are not supported by careful analysis.